liability attaching to the shares, if held by a solvent shareholder.

Violations of the spirit of this section, if not of the letter, not infrequently occur upon the organization of a bank, where shareholders are allowed to give their notes for a portion or the whole of their holdings, without being required to lodge their stock with the bank as security, in direct violation of the letter of the law.

Such evasions of law by officers, on the threshold of a bank's career, do not augur well for its future success, which must depend largely upon honest and fair dealing with all parties having intercourse with it.

The term of six months, during which a bank is allowed to hold its own stock taken for debt, was probably fixed because regarded as ample time in which to arrange for its disposal.

CHAPTER VIII.

EARNINGS, SURPLUS, AND DIVIDENDS.

SEC. 5199. The directors of any association may, semiannually, declare a dividend of so much of the net profits of the association as they shall judge expedient; but each association shall, before the declaration of a dividend, carry onetenth part of its net profits of the preceding half year to its surplus fund until the same shall amount to twenty per centum of its capital stock.

SEC. 5204. No association, or any member thereof, shall, during the time it shall continue its banking operations, withdraw, or permit to be withdrawn, either in the form of dividends or otherwise, any portion of its capital. If losses have at any time been sustained by any such association, equal to or exceeding its undivided profits then on hand, no dividend shall be made; and no dividend shall ever be made by any association, while it continues its banking operations, to an amount greater than its net profits then on hand, deducting therefrom its losses and bad debts. All debts due to any associations, on which interest is past due and unpaid for a period of six months, unless the same are well secured, and in process of collection, shall be considered bad debts within the meaning of this section. But nothing in this section shall prevent the reduction of the capital stock of the association under section fifty-one hundred and forty-three.

SEC. 5212. In addition to the reports required by the preceding section, each association shall report to the Comptroller of the Currency, within ten days after declaring any

dividend, the amount of such dividend, and the amount of net earnings in excess of such dividend. Such reports shall be attested by the oath of the president or cashier of the association.

Legal Requirements regarding Net Profits and Surplus; "Bad Debts" Defined.

Section 5199 empowers the directors to declare a dividend semi-annually, if the "net profits" of the bank will admit; and, as there appears to be no prohibition in the law against their declaring dividends oftener than this, or less frequently, they are permitted to do so, provided they comply with all the requirements of the law in respect to surplus, dividends, and earnings. Before declaring a dividend it is necessary, of course, to know whether the "net profits "will admit of this, and section 5204 requires that "net profits" must be arrived at by deducting from gross earnings, or "undivided profits" from all sources, the following items:

1. Expenses and taxes paid.

2. Losses which have been sustained from any cause. 3. The amount of "bad debts" as these are clearly defined by section 5204. It will be observed here that these debts, which are technically "bad," are not to be confused with those which are known to be actually bad, for these latter should be classed with "losses sustained;" but, at the same time, section 5204 requires that debts which are "bad" technically should always be taken into account in comput

ing net profits before declaring a dividend, whether they are charged off the books of the bank or not.

Having arrived at the "net profits" in this way, it is necessary that every bank whose "surplus fund" is less than 20 per cent. of its capital stock should, before declaring a dividend, carry at least 10 per cent. of these profits to this fund as required by section 5199. The bank may, if it so desires, carry to the fund an amount greater than the required 10 per cent. of its "net profits," but, once this is done, the law makes no provision for withdrawing the excess so carried for the purpose of declaring a dividend so long as the surplus is less than the required 20 per cent. While the law is entirely silent as to the purposes for which the surplus is created and may be used, the presumption is that the object of its accumulation is to provide a fund for meeting unexpected or unusual losses without resorting to an assessment of the stockholders, in case such losses exceed the "undivided profits" on hand at the time; and, in this view of the subject, a bank whose surplus is 20 per cent. or less is allowed to use the whole or a portion of it to make good such losses, but only then after it has first exhausted all of its "undi

vided profits" on hand. In such a case, a bank having to use all of its undivided profits for making losses good, has, of course, nothing wherewith to declare a dividend, and must perforce pass its dividend for such a period. As soon thereafter, however, as its "net profits" will admit,

it

may declare a dividend, but before doing this it will be necessary to carry one-tenth of such profits to the surplus fund, which has been reduced below 20 per cent., and to continue to do this at the end of each dividend period until this fund again reaches the required limit of 20 per cent.

Whenever the surplus of a bank exceeds 20 per cent. of its capital, it is lawful for the directors to use the excess for declaring a dividend or for making losses good, and in this latter case it will not be necessary to pass any dividend, provided the excess over 20 per cent. in the surplus is sufficient to provide for such losses.

Legal Requirements with regard to Reports of Dividends and Earnings; How to Make These Up. As section 5212 prescribes that "each association shall report to the Comptroller of the Currency within ten days after declaring any dividend, the amount of such dividend, and the